Competitive Balance Tax Revisions Could Spark Major League Baseball’s Labor Negotiations

The Major League Baseball Players Association (MLBPA) plans to present Major League Baseball with an in-person counteroffer scheduled to take place on January 24^th. Since the December 2^nd announcement of the lockout by Commissioner Manfred in a letter to baseball fans on MLB.com, the negotiations have oddly lacked a sense of urgency which have been highlighted by a 42-day gap between conversations on key economic issues. The recent bargaining session on January 13^th held via Zoom proved to be fruitless as several matters remain unresolved with spring training scheduled to begin in less than a month’s time.

The MLBPA has legitimate concerns regarding service time manipulation, competitive integrity, free agency, salary arbitration, and revenue sharing. Let’s also not forget the onerous Competitive Balance Tax and how it serves as a deterrent for ball clubs by serving as a de facto salary cap. Major League Baseball is very comfortable with the current structures of free agency and revenue sharing. Fortunately, there seems to be an opportunity to entertain conversations on how to effectively compensate ball players who fall within the two-to-three-year window of service time as well as an increase in the minimum salary.     

The prevailing questions are whether the MLBPA will make any concessions in the spirit of moving the negotiations forward or how far they are willing to challenge Major League Baseball. Some believe concessions have already been made by Major League Baseball regarding the universal designated hitter and ideas on how to increase salaries for younger ball players. The concept of a lottery to avoid ball clubs from losing on purpose to secure higher draft picks is appealing as is revisions to the qualifying offer system and how it adversely affects free agency.  

It is likely the MLBPA will continue to impress upon Major League Baseball the importance of creativity and innovation when it comes to aligning compensation with performance. Even though the request will likely fall on deaf ears, expect the MLBPA to vigorously fight for an accelerated path towards free agency and incentive-based initiatives for arbitration and service time. They will also strongly support revisions to the Competitive Balance Tax beginning with a significant increase to the base tax threshold. It should be a system that encourages ball clubs to actively invest in talent under equitable guidelines instead of serving as an obstruction to spending with severe penalties.

Major League Baseball has already expressed a willingness to increase the base tax threshold in the Competitive Balance Tax. This could be a real opportunity for both parties to finally begin serious negotiations on key economic issues. According to the recently expired collective bargaining agreement, the base tax threshold for the 2021 season was $210 million. Major League Baseball has proposed a meager increase to $214 million for the 2022 season with the goal of reaching $220 million by the final season of the next collective bargaining agreement. The MLBPA would like to see a base tax threshold begin at $245 million to stimulate spending among the ball clubs.

According to data collected by Forbes’ Maury Brown and the Associated Press, seven ball clubs had Competitive Balance Tax payrolls of at least $200 million last season. Overall, 15 ball clubs had exceeded $165 million. Out of the 10 ball clubs who had qualified for the 2021 postseason, only two didn’t eclipse $165 million in Competitive Balance Tax payrolls: Milwaukee Brewers ($131,990,136) and Tampa Bay Rays ($89,833,652). Competitive Balance Tax payrolls are calculated by the average annual values of contracts for ball players on the 40-man roster as well an additional $15.5 million for benefits.

Only the Los Angeles Dodgers and San Diego Padres were responsible for penalty payments while the remaining five ball clubs with at least $200 million Competitive Balance Tax payrolls fell within $3.4 million of the $210 million base tax threshold. Clearly, the Competitive Balance Tax factors heavily into the decision-making process for ball clubs whether it is a free agent acquisition or an in-season opportunity to acquire talent though a trade. Even though the Boston Red Sox, Los Angeles Dodgers, and New York Yankees have become synonymous with the Competitive Balance Tax, a total of nine ball clubs have paid penalties over the past 19 seasons totaling $553 million according to Brown’s math. Six of the ball clubs have won a combined 11 world championships during the current Competitive Balance Tax era (2003-2021).  

If one ever had a question as to why the Competitive Balance Tax is an issue of importance for the MLBPA, you must look at the Dodgers and how they were recently penalized for their investment in ball players. A crown jewel franchise deeply committed to winning, their Competitive Balance Tax 2021 payroll was an astonishing $285,599,944. The Dodgers had surpassed the base tax threshold of $210 million as well as the first surcharge threshold of $230 million and the second surcharge threshold of $250 million. Since they did not exceed the base tax threshold in the previous season, the Dodgers were classified as a first-time Competitive Balance Tax payor, but they still had to pay a hefty tax for assembling a high-quality ball club that has won three National League pennants and one world championship over the past five seasons.

The Dodgers had to pay three levels of financial penalties. The first was a 20 percent tax on the $20 million difference between the $210 million base tax threshold and the $230 million first surcharge threshold. Next, they had to pay a 32 percent tax on the $20 million difference between the $230 million first surcharge threshold and the $250 million second surcharge threshold. Finally, they paid a 62.5 percent tax on the remaining $35,599,944. In total, the Dodgers paid a Competitive Balance Tax bill of $32,649,965 after winning 106 ball games and reaching the National League Championship Series. As a result of surpassing the second surcharge threshold, the Dodgers were also assessed with an additional penalty of having their first pick in the 2022 draft moved back ten spots to 40^th overall.

Something that normally goes unnoticed is where does the money go and who benefits from the Competitive Balance Tax? Using last season as an example, the Dodgers and Padres combined for a $33,943,443 penalty payment which saw the first $13 million go to fund player benefits. Out of the remaining $20,943,443, 50 percent went to fund individual retirement accounts. The final $10,471,722 was divided equally among the 28 ball clubs who did not exceed the base tax threshold and each received $373,990.

The Major League Baseball Players Association’s counteroffer to Major League Baseball must be bold with a direct emphasis on economics. However, they need to identify one area where they can build momentum and set a positive tone for meaningful negotiations. Both are willing to explore revisions to the Competitive Balance Tax and would be a good starting point. While seismic changes to the tax rates for first, second, or third time Competitive Balance Tax payors is unlikely, both parties need to seriously consider sizable increases to the three tax thresholds and removing non-financial penalties regarding draft picks. An opportunity exists to change the culture surrounding the Competitive Balance Tax by encouraging ball clubs to invest in talent, but it begins with a willingness to listen carefully and think differently.